Sebi eases rules for foreign investors, alternative investment funds

Mumbai: India’s markets regulator has relaxed its rules for foreign investors, alternative investment funds, and registered investment advisors amid increasing cash equity market trading volumes. At the same time, the Securities and Exchange Board of India (Sebi) will also review several provisions relating to conflict of interest and related matters pertaining to its members and officials.

In its first board meeting under new chairman Tuhin Kanta Pandey on Monday, Sebi increased the investment threshold for granular ownership disclosures by foreign portfolio investors (FPIs) from ₹25,000 crore to ₹50,000 crore.

Sebi on Monday also permitted Category II alternative investment funds (AIFs) to invest a larger portion of their assets in listed debt securities with credit ratings of ‘A’ or below, and registered investment advisors or RIAs to collect up to one year’s fee in advance, reversing the previous three-month limit.

To be sure, Pandey clarified at a media briefing after the board meeting that disclosure requirements remained unchanged for FPIs holding more than 50% of their equity assets under management (AUMs) in India.

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Sebi had in August 2023 made it mandatory for FPIs holding more than ₹25,000 crore worth of AUMs in Indian markets to disclose details of all entities holding any ownership, economic interest, or control.

This August 2023 circular was introduced to guard against any potential circumvention of Press Note-3 rules, which require all investments from countries that share a land border with India to be cleared by the Union government.

Review on the cards

In another significant move, the markets regulator has decided to constitute a high-level committee (HLC) to undertake a comprehensive review of provisions relating to conflict of interest, disclosures pertaining to property, investments, liabilities, and other related matters in respect of its members and officials.

“The HLC shall comprise of eminent persons and experts with relevant background and experience in constitutional/statutory/regulatory bodies, government/public sector, private sector and academia. The names of the HLC members will be announced in due course,” Sebi said in a statement.

Pandey emphasized in the media briefing that there was a certain trust that needed to be built up in the regulator. “People, both in our organization and outside, need to be clear that things are fine, and there is no tendency to hide. We don't want to do that.” he said, adding that the HLC would look to build a framework to clarify what needs to be disclosed, how will it be disclosed, how does one make a complaint, where does it go, and how does it get mitigated.

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"How would recusals be made public, at what amount and at what stage. How do we make public aware? We have to have a system in place to operationalise it,” Pandey said.

Industry reaction

Experts welcomed the move. Jyoti Prakash Gadia, managing director of investment bank Resurgent India, called it a timely step towards strengthening Sebi's governance standards and suggested a review of the levels of transparency and depth of disclosure to make them more meaningful.

“The discussion in recent times on the functioning and credibility of board members and senior officials had become a subject matter of discussion and public scanner,” Gadia said, adding that the proposed committee could be mandated to go into a wide range of issues relating to conflict of interest, personal conduct, and background of the board members including disclosures about property ownership investments and liabilities.

Furthermore, Sebi has addressed concerns raised by RIAs regarding advance fee collection. The board has decided to allow investment advisors (IAs) and research analysts (RAs) to charge fees in advance for up to one year, extending the previous limits of two quarters and one quarter, respectively. This move provides greater financial flexibility to these professionals.

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Sebi has also deferred the implementation of certain amendments to its regulations. The regulator’s board, which had previously approved merchant bankers, debenture trustees, and custodians to carry out other regulated activities as separate legal entities, has now decided to conduct a thorough internal review and evaluate alternative approaches.